What are some commonly used techniques to transfer the business to family?
Minneapolis attorney Sally Grossman describes techniques that are often used to transfer the business to family members.
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There are a lot of different ways that you can transfer the business to family. I’ll talk just about a few of them because I don’t want this to become an estate planning treatise, but probably the easiest and simplest is outright gift, and I’ve actually used outright gifts very successfully with clients. You can transfer a part of the business. The owner has to be able to give up the earnings off that business. You can’t transfer the tree and then try to keep the fruit.
So, I’ll have a client say to me, “Well, I want to give the business to my son or daughter.” I’ll say, “That’s great.” And they’ll say, “But I don’t want to give them the dividend checks.” Like, no, no. One way or the other, but an outright gift is easy, it’s fairly simple. You probably have to pay for an appraisal, it has some tax advantages because it can get the business, which is usually an appreciating asset out of your estate, and so it can save you estate taxes on the far end. That’s an easy one.
Another level complexity would be perhaps to sell on an installment note. So, the child will put something down, the rest is sold over time, so that’s kind of a seller financing, and that’s a good way to transition the business. It makes it more affordable for the child. You can get out now and still keep some income stream as the business owner. You will pay some income tax normally if you’ve had appreciation, but you will get the asset out of your estate.
More complex would be something like a grant to retain annuity trust. A grant to retain annuity trust is an irrevocable trust where the business owner puts the property into the trust, keeps an annuity stream for a number of years, and then at the end of the term it either passes outright to the kids or it stays in continuing trust if the children were younger, and it can be a great way to move an appreciating asset out of the estate at very low gift tax cost.